Deck 2: Business Transaction Analysis and Financial Statement Effects

Question 1

The profit margin ratio = sales ÷ net income.

Answer 1

False

Question 2

The COGS calculation is used to determine inventory expense in relation to sales revenue, in accordance with:

A)Revenue recognition criteria
B)Matching principle
C)Transaction analysis
D)Timeliness

Answer 2

B

Question 3

Which of the following is a revenue recognition criterion?

A)All amounts have been collected.
B)All expenses have been paid.
C)There is reasonable assurance that recorded revenues and expenses will ultimately be received or paid.
D)There is a high probability that company will perform the major things associated with the sale.

Answer 3

C

Question 4

The accounting basis that attempts to measure performance in the period in which it occurred is the:

A)Approval basis
B)Cash basis
C)Matching basis
D)Accrual basis

Question 5

The purchase of a three-year insurance policy should be reflected on the balance sheet under current assets.

Question 6

The issuance of common shares with a value of $5,000 to purchase land will increase the common share account.

Question 7

The return on assets = net income ÷ average total assets.

Question 8

Accumulated amortization is deducted when calculating net income.

Question 9

A company received a $6,500 deposit from a customer for goods to be delivered the following month.Under the accrual and cash basis of accounting respectively the deposit would be recorded as:

Question 10

Beginning inventory - purchases + ending inventory = COGS.

Question 11

Use the following information for questions
During a recent week, Cairns Consulting received $15,000 cash from clients for services performed with a total value of $50,000.The balance is to be received within 30 days.
The effect of this transaction in the accounting records would be:

A)+ $50,000 revenue = + $15,000 cash + $35,000 accounts receivable
B)+ $35,000 net income = + $35,000 assets
C)+ $15,000 revenue = + $15,000 cash
D)+ $50,000 revenue = + $50,000 accounts receivable

Question 12

The sales of merchandise on credit will cause the retained earnings and long term liabilities accounts to increase.

Question 13

Dividends are an expense of doing business.

Question 14

Straight-line amortization = cost + residual value) ÷ estimated useful life.

Question 15

How is cash invested by shareholders in exchange for shares initially recorded in the accounting records?

A)As an increase in retained earnings, and an increase in cash.
B)As an increase in long-term investments, and a decrease in cash.
C)As an increase in common shares, and a decrease in cash.
D)As an increase in common shares, and an increase in cash.

Question 16

Which of the following represents the cost of goods sold calculation?

A)Beginning inventory + ending inventory - purchases
B)Beginning inventory + purchases - ending inventory
C)Purchases + ending inventory - beginning inventory
D)Purchases - beginning inventory - ending inventory

Question 17

The purchase of equipment costing $8,500 for $1,500 down and the balance on account will increase both sides of the balance sheet equation by $7,000.

Question 18

On July 1, 2011 Albert Company paid $5,200 for a 1-year insurance policy.To record this transaction Albert Company should:

A)decrease cash and increase insurance expense
B)decrease cash and increase prepaid insurance
C)increase accounts payable and increase insurance expense
D)increase cash and increase prepaid insurance

Question 19

Revenue recognition criteria are necessary to determine when to recognize revenue when using both accrual and cash accounting methods.

Question 20

Use the following information for questions
During a recent week, Cairns Consulting received $15,000 cash from clients for services performed with a total value of $50,000.The balance is to be received within 30 days.
The effect on the balance sheet equation for this transaction would be:

A)+ $15,000 cash = - $35,000 accounts payable + $50,000 retained earnings
B)+ $15,000 cash - $35,000 accounts receivable = $50,000 retained earnings
C)+ $15,000 cash + $35,000 accounts receivable = + $50,000 retained earnings
D)+ $15,000 cash = + $15,000 retained earnings

Question 21

Which of the following expenses has NO effect on the cash flow of a firm?

A)Salaries expense
B)Interest expense
C)Amortization expense
D)Cost of goods sold

Question 22

Under GAAP long term investments are valued at:

A)historical cost
B)market value
C)current replacement cost
D)inflation adjusted historical cost

Question 23

When $10,000 of inventory is purchased with a six-month note payable bearing 4% interest, the inventory has a total cost of:

A)$10,400
B)$10,000
C)$10,200
D)$9,800

Question 24

In which of the following situations can a company recognize revenue under GAAP?

A)A contract is signed for goods to be delivered next week.
B)Cash is received for goods to be delivered next week.
C)A company completes the production of goods for inventory and knows the costs incurred with certainty.
D)A company ships the goods that it received a deposit for the previous week.

Question 25

A company paid $4,000 for goods it had purchased last month for resale.What is the effect of the payment?

A)A decrease in inventory.
B)A decrease in accounts payable.
C)An increase in cost of goods sold.
D)An increase in inventory.

Question 26

On Oct.1, 2011 Bonita, Inc.signed a 1-year $75,000 note payable from First National Bank.The loan plus 6% interest is to be repaid on Sept.30, 2012.Bonita's year-end is December 31.In its 2011 financial statements Bonita will record interest expense of:

A)$375
B)$1,125
C)$4,500
D)$75,000

Question 27

Dividends are declared by a vote of a company's:

A)Management
B)Shareholders
C)Board of directors
D)Creditors

Question 28

The asset that results from the payment of expenses in advance is:

A)Accounts receivable
B)Short term investments
C)Inventory
D)Prepaids

Question 29

How are goods purchased for sale at a later date recorded in the financial statements?

A)As inventory.
B)As prepaid expenses.
C)As cost of goods sold.
D)As operating expenses.

Question 30

The asset that results when a customer buys goods or services on credit is:

A)Accounts receivable
B)Accounts payable
C)Notes receivable
D)Cash

Question 31

Which of the following assets is never expensed on the income statement?

A)Land
B)Building
C)Inventory
D)Equipment

Question 32

If a vehicle was purchased for $6,500 and has a residual value of $500, the annual amortization expense will be $1,000 if the estimated useful life is:

A)6 years
B)6.5 years
C)7 years
D)13 years

Question 33

The following costs are initially expressed as assets but are then reclassified as expenses when they are used up, except for the following:

A)Inventory
B)Prepaid insurance
C)Prepaid rent
D)Short term investments

Question 34

If a company had $3,500 in inventory on hand at the end of the month, and made purchases of $7,500 during the month, the Cost of Goods Sold they should record on their Income Statement for the month would be:

A)$ 7,500
B)$ 4,000
C)$ 3,500
D)$11,000

Question 35

A company sold available for resale inventory for cash.What is the effect of this sale?

A)increase in revenue, increase in COGS, decrease in inventory
B)increase in revenue, decrease in COGS, increase in inventory
C)increase in revenue, increase in COGS, increase in inventory
D)increase in revenue, decrease in COGS, decrease in inventory

Question 36

A new company signed a lease for office space during their first month of business.At that time they paid a total of $12,000 for first and last months' rent.At the end of the first month, the effect on the financial statements would be:

A)$12,000 rent expense
B)$6,000 rent expense and $6,000 prepaid rent on the balance sheet
C)$12,000 prepaid rent on the balance sheet
D)Nothing recorded because the company has not made any sales yet

Question 37

A piece of equipment was recently purchased for $10,600 on June 30.It is estimated that it will last for 10 years and have a residual value of $400.The amortization expense to be recognized in the year of acquisition, assuming a December year-end, would be:

A)$1,020.00
B)$510.00
C)$318.75
D)$637.50

Question 38

Cost of goods sold should be matched up with the revenue generated on each year's income statement because of the:

A)Revenue recognition criteria
B)Cash basis of accounting
C)Actual basis of accounting
D)Accrual basis of accounting

Question 39

Which of the following is an example of a non-monetary transaction?

A)The purchase of inventory on account.
B)The recording of amortization expense.
C)The expiry of prepaid insurance.
D)The purchase of land by issuing shares.

Question 40

Which of the following will not appear on the income statement?

A)Amortization
B)Interest
C)Cost of goods sold
D)Dividends

Question 41

Use the following information for questions: $$\begin{array} { l r l r } \text { Revenues } & \$ 50,000 & \text { Beginning liabilities } & \$ 245,000 \\\text { Cost of goods sold } & 35,000 & \text { Ending assets } & 450,000 \\\text { Operating expenses } & 5,500 & \text { Ending liabilities } & 255,000 \\\text { Beginning assets } & 350,000 & &\end{array}$$

-The profit margin is closest to:

A)2%
B)19%
C)30%
D)89%

Question 42

If dividends are declared and paid in the same accounting period, what is the net effect on the accounting equation?

A)A decrease in retained earnings and an increase in expenses.
B)A decrease in cash and an increase expenses.
C)A decrease in cash and an increase in retained earnings.
D)A decrease in cash and a decrease in retained earnings.

Question 43

Which of the following transactions would decrease the cash from operating activities?

A)The payment of dividends.
B)The sale of goods on account.
C)The purchase of goods on account.
D)The payment of wages.

Question 44

Use the following information for questions: $$\begin{array} { l r l r } \text { Revenues } & \$ 50,000 & \text { Beginning liabilities } & \$ 245,000 \\\text { Cost of goods sold } & 35,000 & \text { Ending assets } & 450,000 \\\text { Operating expenses } & 5,500 & \text { Ending liabilities } & 255,000 \\\text { Beginning assets } & 350,000 & &\end{array}$$

-The return on assets is closest to:

A)2.1%
B)2.4%
C)3.75%
D)11.13%

Question 45

If the company had a loan outstanding, which of the following would be used to record accrued interest at the end of the accounting period?

A)Increase interest expense, decrease cash
B)Increase interest expense, increase interest payable
C)Decrease interest payable, increase interest income
D)Decrease interest payable, decrease cash

Question 46

When the board of directors declares a $500 dividend, which of the following would be included in recording the transaction?

A)Increase in retained earnings, increase in dividends declared
B)Decrease in cash, decrease in dividends payable
C)Increase in dividends declared, increase in dividends payable
D)Decrease in dividends payable, increase in cash

Question 47

The purchase of land for a combination of cash and issuance of shares would require which of the following?

A)Increase in Land, Increase in Common shares, Increase in Cash
B)Increase in Cash, Decrease in Common shares, Decrease in Land
C)Increase in Land, Increase in Common shares
D)Increase in Land, Increase in Common shares, Decrease in Cash

Question 48

The sale of merchandise to a customer partly for cash and partly on account would require which of the following?

A)Increase in Accounts receivable, Increase in Cash, Increase in Sales revenue
B)Increase in Cash, Decrease in Accounts payable, Increase in Sales revenue
C)Increase in Cash, Increase in Sales revenue
D)Decrease in Accounts payable, Increase in Accounts receivable, Increase in Sales revenue

Question 49

Which of the following would be the most useful in determining if a company has sufficient resources to continue operations in the short-term?

A)The profit margin ratio.
B)The return on assets ratio.
C)The cash from operating activities.
D)The cash from financing activities.

Question 50

Use the following information for questions: $$\begin{array} { l r l r } \text { Revenues } & \$ 50,000 & \text { Beginning liabilities } & \$ 245,000 \\\text { Cost of goods sold } & 35,000 & \text { Ending assets } & 450,000 \\\text { Operating expenses } & 5,500 & \text { Ending liabilities } & 255,000 \\\text { Beginning assets } & 350,000 & &\end{array}$$

-The return on equity is:

A)1.0%
B)6.3%
C)7.6%
D)9.0%